Cryptocurrencies are a highly volatile asset class, much more than FOREX, stock trading, and other speculative businesses on the financial market because a wide variety of unpredictable factors contribute to their price. A digital currency’s price is influenced by the project’s development roadmap, use cases, popularity, adoption rate, media coverage, real-world events, and many other factors.
This is why crypto trading is generally a risky business, and although total beginners can easily start trading digital currency on user-friendly crypto exchanges, there are a lot of advanced trading tools and factors that you’ll only learn to use once you gain some trading experience.
Taking into account the crypto spread while trading on centralised exchange platforms is one of those factors that beginners usually overlook because they tend to use instant buy or sell options. To sell or purchase crypto at the current market price is much easier, but the real profit opportunities lie in spread trading.
Let’s take a deeper look at how crypto trading works and why is it so important to pay attention to the market spread when exchanging digital currencies.
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Crypto Trading on Exchange Platforms
Crypto trading has become so easily accessible that anyone can make a user account on a popular centralised crypto exchange platform, such as Coinbase, Kraken, Binance, and Gemini, in a matter of minutes and start investing in crypto. The largest and most trusted crypto exchanges enable users to quickly buy or sell crypto by taking advantage of the dominant market price of a certain token. All you need to do is connect a valid payment method to your exchange platform accounts, such as a debit card or bank account, and you can start investing.
However, crypto trading wasn’t always so simple. Before the launch of the first Bitcoin exchanges in 2010, it was very difficult to engage in crypto trading. Bitcoin (BTC) was the only available cryptocurrency, and traders had to manually find someone interested in buying or selling BTC, usually on social media groups and crypto-related forums. This was very risky because you never knew who you were going to stumble upon and whether that person was really going to stick to the deal without trying to scam you.
Cryptocurrency Platforms Changed the Trading Game Forever
The situation changed when crypto exchanges appeared because these platforms became central authorities that guaranteed the safety of their users by acting as middlemen in their transactions. Every trade on a crypto exchange is facilitated by the platform, making sure none of their users gets scammed. Of course, the added protection and convenience don’t come for free, and the service fee gets deducted from your trading deals.
As the popularity of cryptocurrency grew and various altcoins like Ethereum (ETH), Litecoin (LTC) and Ripple (XRP) emerged, so, too, the exchange platforms started expanding their services, trading tools and available features. This allowed brokers to implement different trading strategies and plans. The trading costs are just something brokers get used to because they are provided with asset safety and ease of use in exchange for service fees.
When you place a buy or sell order on an exchange platform at the current market price, you’re taking advantage of the dominant price. Since you’re taking away liquidity from the market, you’re acting as a market taker.
On the other hand, market makers are traders who use advanced trading tools and place buy/sell orders at prices that are different from the current market price of a certain cryptocurrency.
A crypto spread is a difference between the highest price at which traders on a platform agree to buy certain crypto and the lowest price at which they are willing to sell that same crypto.
In theory, anyone can place a purchase order at any price they wish, but placing an unrealistically low price doesn’t lead anywhere. That’s why experienced traders tend to place buy orders that are slightly or moderately below the current market price. For instance, if a certain cryptocurrency isn’t very much in demand at the moment, a trader might place a buy order at a price that’s lower than the current market price, and if their order is matched by another trader who’s willing to sell that crypto, then they are adding liquidity to the market.
Ask Price and Bid Price
In crypto trading, the price at which traders are asking for a cryptocurrency is commonly called the Ask price, while the price at which brokers agree to buy crypto is called the Bid price. The spread is the difference between these two values.
Each cryptocurrency has its own spread on each crypto trading platform. The spreads for the same crypto can vary dramatically across different crypto exchanges. Additionally, some cryptocurrencies can have a much larger spread than other cryptos on the same platform because the spread heavily depends on the market liquidity for that particular crypto. This is why some less popular coins and tokens may have large market spreads on platforms where the trading volume for those coins is low. Less popular crypto exchanges with low trading volumes are known to have high market spreads.
Why Is the Market Spread Important?
The market spread is a vital tool for estimating how high or low can you set an ask or bid price for crypto.
You can view your order history in your exchange platform order book, where you can find all the sales and purchases you’ve made on that platform, along with the exact prices. Each cryptocurrency and crypto trading pair also has its own order book, where you can see the order history for those crypto assets on the platform.
Monitoring the bid and ask prices across 24 hours, 7 days or a whole month can help you determine the average spread and for a realistic ask or bid price for your next trading deal. This is how experienced traders make money because they carefully monitor their personal order history and the order book of the assets they are trading to locate opportunities for taking profits.
Monitoring bid prices is a great way to determine the demand for certain crypto on the market – the higher the bid prices, the more traders are prepared to pay for a coin because they want to get their hands on that specific asset. On the other hand, the lowest ask prices are a solid indicator of market supply because if that price is relatively low, then there is an abundance of that specific crypto on the market.
The market spread is a valuable tool for estimating the profitability of a trading deal. For example, the lowest ask price for Litecoin (LTC) is 200 US dollars per coin on a certain exchange platform, while the highest bid price is 150 USD. This means that the LTC spread is 50 USD on that platform, and it would be a very poor trading decision to buy some LTC since you wouldn’t be able to sell it for more than 150 USD per coin.
That’s why you should always take into account the market spread when estimating the profitability of a trade because the fact that the price of a certain coin went down a bit doesn’t necessarily mean that it’s a good idea to buy it. You should always tend to make a purchase when the highest bid price is much higher than the highest ask price. That’s when you’re making the most profits.
Spread Trading Benefits
Taking market spread into account is highly beneficial for crypto traders because if you just buy or sell crypto at the dominant market price, you don’t have an overview of the trade’s potential profitability. If you just see that the instant buy price of Bitcoin is 45,000 USD per coin, while the price has been 45,200 USD the previous day, you don’t really have a full overview of the profitability of purchasing BTC at that price.
If you take a detailed look at the Bitcoin order book on your chosen exchange platform and manage to calculate the spread during the last couple of days, then you can actually assess if the instant buy price is really profitable. In case it isn’t, and it probably won’t be, you’ll get a clear idea of the market sentiment based on the actual spread and set a buy order with a bid price that will generate you more profits.
Spread Trading Risks
Although spread trading can generate more profits than instant buy and sell orders, it’s also very risky, because sometimes, when a crypto’s price is highly volatile, your trading order might be unsuccessful because of sudden price movements or you might lose the profit-taking window. That’s why spread trading requires brokers to pay close attention and monitor the order books of the asset they are trading.
CFD vs Spread Betting
The crypto market spread is also important for spread betting, which is a highly speculative brokerage tool that can literally be described as betting on the price movement of specific assets. Traders can invest money in betting on whether an asset is going to increase or decrease in value during a certain period of time.
Spread betting is an extremely risky business because it’s basically a gamble since you don’t really have a guaranteed method to know whether Bitcoin or another coin is going to rise or fall in value during the next couple of days. However, spread betting is very attractive for traders with a huge risk appetite. This activity is facilitated by specialized spread-betting companies.
CFDs (Contracts for Difference) also enable traders to conduct speculative investments regarding the future price of assets, but they are conducted through over-the-counter (OTC) brokers. A CFD is considered tradable security that can be sold and exchanged between traders and OTC brokers.
Both CFDs and spread bets are derivatives whose value doesn’t give ownership over assets to traders. When you engage in these activities, you don’t get to own stocks or crypto. You’re just speculating on the future price movements of these assets. The key difference between CFDs and spread bets is the fact that a CFD doesn’t have an expiration date, while spread bets are always fixed to a certain time period.
A Few Words Before You Go…
Understanding how crypto spreads work and why they are important is vital for advanced crypto trading. It allows brokers to take advantage of market sentiments and make considerably higher profits than market takers. However, you should always be careful and take into account the high market volatility that can quickly turn spread trading into a disaster.